Bloomberg Tax
Free Newsletter Sign Up
Bloomberg Tax
Welcome
Go
Free Newsletter Sign Up

No Strings Attached Tax Deal Shows Depth of eBay-San Jose Ties

Sept. 25, 2019, 9:59 PM

Online marketplace eBay Inc’s long-term relationship with its hometown of San Jose, Calif., birthed a tax sharing agreement unlike any other—millions of dollars with no strings attached.

San Jose City Council on Sept. 24 gave its city manager the go-ahead to negotiate a 15-year pact with the online marketplace giant which could bring about $440 million in newfound taxes to the city and $150 million to eBay.

The agreement, which San Jose officials said was eBay’s idea, leverages the same local sales tax revenue that dozens of other cities have used in similarly structured deals, from nearby Cupertino in its 22-year deal with Apple Inc. to the rural town of Dinuba in its 2015 deal with Best Buy. Those cities, however, tout their deals as a boon for jobs and economic development. San Jose said its deal with eBay is neither a subsidy nor an economic development tool.

Instead, it’s an “opportunity” to bring in unexpected new tax revenue and help eBay with the difficult task of of collecting online sales and use tax for the first time, Economic Development Director Kim Walesh said in a memo to the council. That opportunity was created by a U.S. Supreme Court decision and a new California law that requires eBay to collect sales tax from customers who make purchases on its platform starting Oct. 1.

Similar agreements in other cities often require companies to relocate or expand facilities or employment in return for a share of tax revenue, Walesh said. This time, there are no promised jobs, no pledge to keep certain operations in the city or any similar incentive. There’s only a ticking clock to strike a deal.

The parties only have a few months to complete an agreement should Gov. Gavin Newsom (D) sign a bill that would ban new sharing deals but allow existing ones to continue. A separate bill would permit continued business incentives deals between companies and cities as long as they’re transparent. Newsom has until Oct. 13 to sign bills passed this session.

San Jose’s agreement “is not intended to lure away a company from another city, but rather is aligning partnership interests with a long-time, San Jose born-and-bred company,” Walesh said.

The company said it’s committed to the community that thousands of eBay employees call home. As the Oct. 1 effective date for the state legislation approached, “eBay partnered with the City of San Jose to direct a meaningful contribution of tax revenue back to our community,” spokeswoman Ashley Settle said in an email.

A Unique Relationship

The deal with eBay is a break with past practice for San Jose officials. They didn’t offer any tax breaks to Alphabet Inc.'s Google Inc. for its planned downtown campus that would bring in some 24,000 workers. Nor did the city offer Amazon.com Inc. any benefits during the nationwide competition for the online marketplace’s second headquarters, Walesh said in an interview.

San Jose is proud of eBay, which was founded in a San Jose living room in 1995 and has grown to occupy a sprawling business park it now owns not far from city hall. The company recently built a 20,000-food welcome center, and is consistently among the city’s top 10 employers, the memo said.

“Staff felt it was important to reach a very different type of agreement, where the clear majority of revenue is retained by our city but where our interests are aligned with eBay,” Walesh told the City Council.

Under the deal, eBay would declare all taxable sales in California as made in San Jose, rather than in the location where the seller or customer is located. The assignment of all of eBay’s California sales to San Jose means the city will receive the full 1 percent increment of the state’s 7.25 percent sales tax instead of dividing those dollars among local governments based on where a sale happened.

The city would keep the first $5 million in local taxes from California sales made through the marketplace platform , and pay eBay 30% of the increased revenue above $5 million in taxes collected on transactions.

Mayor Sam Liccardo (D) praised the staff for working on the “very opportunistic” concept.

“This was obviously one of those rare opportunities we have to actually find ways to generate more revenues to support whatever critical needs we know we have in the city,” Liccardo said. “And I’m just so grateful that folks were astute enough to jump at this opportunity and that we have a partner in eBay who was willing to find a win-win.” ”

The council agreed to consider spending the new revenue on affordable housing, and would make decisions about how to use the money during negotiations for the city budget in the spring for the next fiscal year starting July 1, 2020.

If the deal is finalized, San Jose would get its first installment in February after eBay files its fourth quarter taxes with the state, Walesh said. The funds will be set aside and not allocated for any specific program.

To contact the reporters on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com; Joyce E. Cutler in San Francisco at jcutler@bloomberglaw.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com

To read more articles log in.

Learn more about a Bloomberg Tax subscription